PIMCO vs. Vanguard Bond fund

[mexico]

Hi everyone,
Been awhile since I have posted. 47yo with target fire date of next yr. I am in process of reallocating and would appreciate any thoughts on my bond option in 401k plan. This would pertain to about $375,000 and decision is not insignificant. The biggest question I have is weighing expense ratio vs. historical performance.

PIMCO total return Inst.
Expense ratio .46%
1 yr return 5.99
3 yr return 9.36
5 yr return 8.34
10 yr return 7.03
Morningstar rates as 5 star

Vanguard total bond Index
Expense ratio .11%
1 yr return 7.69
3 yr return 6.72
5 yr return 6.23
10 yr return n/a
Morningstar rating 3 star

Would appreciate any thoughts and hope everyone who is retired is enjoying life. Any strong thoughts on either fund?

 

[MasterBlaster]

I suspect that the two funds portfolios are (at least somewhat) different.

So directly comparing the two is difficult. If they were exactly the same then the expense ratio would tell the whole story.

My question is... What is the risk-normalized return ?

Check out the Morningstar website and see what they have to say about each.

 

[FinanceDude]

PIMCO will be riskier than Vanguard. PIMCO total return has wide range flexibiltiy of what it can invest in. They could be long Treasuries one month and short them the next. Index funds have to stay true to the index, which is one reason their expense ratios are low. It is not hard nor expensive to buy the index.........

It depends on your idea of risk. If you are allocating to bonds, you could always do a 50/50 between the two and cover your bets.

 

[clifp]

I think one of the big differences between PIMCO and Vanguard is Vanguard large exposure to US government debt. Fully 43% of Vanguard is invested in US government debt vs 25% for PIMCO. This is 10-15% higher than it was a few years ago. Not surprisingly 7 trillion dollar of additional US government debt has changed the nature of the bond indexes.

Add to that roughly 30% of both funds portfolio in mortgage back securities (again mostly guaranteed by Fannie, Freddie or Uncle Sam) and your aren't getting much true diversification by Vanguard (and not a ton by PIMCO but more).

So if you think that US bonds are going to continue to be a great investment, than Vanguard total bond market is the place to put your money. I am skeptical.

 

[pb4uski]

PIMCO will be riskier than Vanguard. PIMCO total return has wide range flexibiltiy of what it can invest in. They could be long Treasuries one month and short them the next. Index funds have to stay true to the index, which is one reason their expense ratios are low. It is not hard nor expensive to buy the index.........

It depends on your idea of risk. If you are allocating to bonds, you could always do a 50/50 between the two and cover your bets.

+1 PIMCO will make bets within the bond space, as seen last year when Bill Gross bailed out of Treasuries (prematurely in hindsight). Over the long run PIMCO has a great record as can be seen in the better returns other than one year. Vanguard just buys the index.

 

[LOL!]

No one can predict the future.

My spouse's 401(k) is invested 100% in the PIMCO fund.
My 401(k) is invested partly in a total bond index fund.

There is no reason to pick one over the other, but some years (2011) one will do better and some years (so far 2012) the other will do better.

If you can't decide, then don't decide. Invest in both.

 

[Lsbcal]

We own both PTTRX and VBTLX. To compare them on past history I'd use rolling returns. This is the chart for 5 year rolling returns from M*:

 

[amfox1]

They are very different funds (and we own both, albeit much more of VBTLX). PTTRX has generally kept to longer bond maturities and is more aggressive than VBTLX. Some relevant stats are below:

PTTRX - 3.87% yield, 7.02 yr. duration, YTD +4.24% (23% gov't, 20% securitized, 15% corporate, 2% municipal, 9% cash, 31% other as of 12/31/11)

VBTLX - 3.10% yield, 5.04 yr. duration, YTD +1.29% (43% gov't, 29% securitized, 21% corporate, 1% municipal, 6% cash as of 12/31/11)

Today's bond yields are at or near historical lows. Bond returns are likely to be low in the future. If expected returns are low, then low expenses become much more important. PTTRX's expenses are 0.46%, while VBTLX's expenses are 0.10%. The combination of PTTRX's size and high expenses relative to VBTLX give PTTRX two significant headwinds going forward.

We have a mix of bond investments right now, with VBTLX as our core taxable fund, divided as follows:

Tax-deferred accounts (45%):
24% VBTLX Vanguard Total Bond Market Index Fund
9% VAIPX Vanguard Inflation Protected Securities Fund
8% VWEAX Vanguard High-Yield Corporate Fund
2% PTTRX Pimco Total Return Instititutional (DW 401(k) - sole holding)
2% bond portion of other mutual funds

Taxable accounts (55%):
23% pool of individual municipal bonds
22% VMLUX Vanguard Limited-Term Tax Exempt Fund
4% Series I/EE/gov't bonds
6% bond portion of other mutual funds

 

[foxfirev5]

I think one of the big differences between PIMCO and Vanguard is Vanguard large exposure to US government debt. Fully 43% of Vanguard is invested in US government debt vs 25% for PIMCO. This is 10-15% higher than it was a few years ago. Not surprisingly 7 trillion dollar of additional US government debt has changed the nature of the bond indexes.

Add to that roughly 30% of both funds portfolio in mortgage back securities (again mostly guaranteed by Fannie, Freddie or Uncle Sam) and your aren't getting much true diversification by Vanguard (and not a ton by PIMCO but more).

So if you think that US bonds are going to continue to be a great investment, than Vanguard total bond market is the place to put your money. I am skeptical.

I have the same funds available in my 401k. Previously I have had equal amounts in both, about 40% of my AA. Recently I backed off about 15% of my VG TBM into a SV fund with a similar rate. We'll see how it works out. More return , more risk. The Pimco has a longer duration, ie risk.

 

[pb4uski]

They are very different funds (and we own both, albeit much more of VBTLX). PTTRX has generally kept to longer bond maturities and is more aggressive than VBTLX. Some relevant stats are below:

PTTRX - 3.87% yield, 7.02 yr. duration, YTD +4.24% (23% gov't, 20% securitized, 15% corporate, 2% municipal, 9% cash, 31% other as of 12/31/11)

VBTLX - 3.10% yield, 5.04 yr. duration, YTD +1.29% (43% gov't, 29% securitized, 21% corporate, 1% municipal, 6% cash as of 12/31/11).....

I'm not sure that the extra 77 bps of yield is worth the interest rate risk associated with the additional 2 of duration. If rates went up 200 bps it would take over 5 years to recover the additional decline in fair value. Obviously a higher increase in rates would exacerbate the problem.

 

[jimnjana]

I'm not sure that the extra 77 bps of yield is worth the interest rate risk associated with the additional 2 of duration. If rates went up 200 bps it would take over 5 years to recover the additional decline in fair value. Obviously a higher increase in rates would exacerbate the problem.

Assuming pimco mangement stood pat while rates were rising, you would be correct. Their track record indicates that they would mitigate this problem effectively.

 

[Lsbcal]

I'm not sure that the extra 77 bps of yield is worth the interest rate risk associated with the additional 2 of duration. If rates went up 200 bps it would take over 5 years to recover the additional decline in fair value. Obviously a higher increase in rates would exacerbate the problem.

From Mar-04 to May-06 the 5yr Treasury went from 2.8% to 5.0%. The CAGR's for that period were PTTRX 2.4%, VBMFX 1.7%. I don't know what the relative durations were of the funds at that time but both seemed to have survived that rate rise period.

I don't think the relative durations of the funds will tell us what will happen if rates rise over a 2 year period. I really doubt that rates will rise extremely suddenly but there is always a minor risk.

 

[pb4uski]

I concede that since the PIMCO fund is more actively managed than the index fund that PIMCO management could do some portfolio actions to mitigate the consequences of rate increases. If they take the right actions at the right times then the effect of increases in rates might be less dramatic. PIMCO does have a good history of making the right calls at the right times, other than their flight from treasuries in 2011.

 

[mexico]

Thank you everyone for the well thought replies. I think I am going to put 50% into each fund for now. Still learning about a lot about bonds of this and the replies are very helpful.

 

[friar1610]

Although I don't know this for sure, I would assume that some of the same things apply to managed bond mutual funds as they do to stock mutual funds. Specifically, that there may be individual funds that beat the index for a year or some number of years but that reversion to the mean kicks in at some point. Bill Gross is sorta the Bill Miller of bond funds in that he has a long record of doing very well vs. his benchmark (as did Bill Miller of Legg Mason Value Trust who beat the S&P 500 consistently for over 10 years). But even Miller's fund reached a point where it no longer beat the S&P. I would guess the same phenomenon may apply to bond funds.

That said, the OP's inclination to go 50-50 makes a lot of sense to me.

Disclosure: My bond funds are VG Total Bond Market and VG Short-term Bond Index. I also have a bunch of I-Bonds that I bought back in the good old days of 3.4% and 3.6% fixed rates.

 

[FinanceDude]

Although I don't know this for sure, I would assume that some of the same things apply to managed bond mutual funds as they do to stock mutual funds. Specifically, that there may be individual funds that beat the index for a year or some number of years but that reversion to the mean kicks in at some point. Bill Gross is sorta the Bill Miller of bond funds in that he has a long record of doing very well vs. his benchmark (as did Bill Miller of Legg Mason Value Trust who beat the S&P 500 consistently for over 10 years). But even Miller's fund reached a point where it no longer beat the S&P. I would guess the same phenomenon may apply to bond funds.

That said, the OP's inclination to go 50-50 makes a lot of sense to me.

Disclosure: My bond funds are VG Total Bond Market and VG Short-term Bond Index. I also have a bunch of I-Bonds that I bought back in the good old days of 3.4% and 3.6% fixed rates.

Bonds are easier to manage than stocks. Bill Gross has been called the "Warren Buffett" of bonds, that's pretty high praise.